Like any other investor, you first need to make sure you’ve got enough cash to pay your routine bills before you make any investments. But you need more liquidity than the average wage slave, because your income is less certain, says Newell. He recommends keeping "a bumper zone" of three to six months' living expenses in liquid investments. "I often encounter resistance from entrepreneurs," he adds. "They say: 'That money's not doing anything for me.'"

If that's your reaction, think of this money as an emergency fund. Remember that the success of your business depends on its staying power, says Harold Evensky, a financial adviser in Coral Gables, Fla. "You need a liquidity reserve so that when times get tough, you don't have to worry about supporting your family while you're trying to support your business," he says. But don't go overboard and stockpile cash, warns Larry Elkin, a financial planner and tax accountant in Hastings-on-Hudson, N.Y., or you'll wind up with a barbell portfolio: "At one end, your company — an undiversified, illiquid, somewhat risky investment — and at the other end, a money-market fund." At most, Elkin says, you need enough liquidity to cover your cash-flow needs over the next year or two.

Where to stash it? Just about any money-market fund will do. But if you're looking to squeeze out a little more yield for only a little more risk, put half your cash in short-term corporate-bond funds with one-to-three-year maturities. We screened Morningstar's mutual-fund database for short-term portfolios that consistently ranked in the top 10% over the past five years with low volatility and low expenses. On that basis, a good choice would be Montgomery Short-Duration Government Bond Class R (800 572-3863). This no-load fund boasts a 6.63% annualized five-year return and has at least 65% of its holdings in federally backed issues. Put the other half in three- and six-month Treasury bills with staggered maturities, so that fresh cash becomes available each month. Skip your broker and establish a TreasuryDirect account through the Federal Reserve (www.publicdebt.treas.gov/sec/sectrdir.htm). It works much like a brokerage account: There's no commission and usually no state or local tax.

>>> Continued >>>